Government

Revenue

Collection

•        Total revenue collected as at the end of August 2024 amounted to Kshs 331.6 bn, equivalent to 12.6% of the revised estimates of Kshs 2,631.4 bn for FY’2024/2025, and is 75.6% of the prorated estimates of Kshs 438.6 bn. Cumulatively, tax revenues amounted to Kshs 312.8 bn, equivalent to 12.6% of the revised estimates of Kshs 2,475.1 bn and 75.8% of the prorated estimates of Kshs 412.5 bn

•        The government was unable to meet its prorated revenue targets for the second consecutive month of the FY’2024/2025, attaining 75.6% of the revenue targets in August 2024, mainly on the back of the tough economic situation exacerbated by the elevated high credit cost in the country, with the commercial banks weighted average lending rates for the month of August 2024 coming in at 16.8% remaining relatively unchanged from the figure recorded in June. The cost of living remains elevated in the country, which continues to impede revenue collection despite an improvement in business environment with the PMI coming in at 50.6 in August 2024 from the 43.1 recorded in July 2024. In light of this, the government is yet to fully benefit from the strategies put in place to improve revenue collection such as expanding the revenue base and sealing tax leakages, and suspension of tax relief payments. The coming months’ revenue collection performance will largely depend on how quickly the country’s business climate stabilizes. This stabilization is expected to be aided by the ongoing appreciation of the Shilling, which gained by 0.7% against the dollar in the since the last meeting in August, easing inflationary pressures, and, an ease in the monetary policy in the country, with the Monetary Policy Committee (MPC) announcing a downward revision of the Central Bank Rate (CBR) by 25 bps to 12.75% from 13.00% following their last meeting on 6th August 2024.

•        In the short term, we expect the revenue collections to be affected as a result of the withdrawal of the Finance Bill 2024. We expect a revenue shortfall for the FY2024/2025 budget, and will likely result in Kenya missing the 4.7% fiscal deficit target this year.

•        The proposed raft of tax changes in the Finance Bill 2024 were geared towards expanding the tax base and raising revenues to meet the government’s budget for the fiscal year 2024/2025 of Kshs 3.9 tn. The government’s continued efforts to broaden the tax base will have been hampered. Among the key provisions in the Act included a removal of VAT exemption for several financial services, making them subject to the standard VAT rate of 16.0%, introduction of a new 2.5% tax on the value of motor vehicles, payable when issuing insurance cover, and taxing income from digital marketplaces or platforms and digital content monetization at 20.0% for non-residents and 5% for residents. As such, we expect the tax collections to be hindered in the long-term and thus impede the government’s efforts to meet it revenue collection targets

•        Nevertheless, given the improving general business environment which is underpinned by the appreciation of the Kenyan shilling, easing liquidity in the money market, and easing inflationary pressures, we expect these to support the tax revenue, but remain wary of the unpredictable tax regime that may weigh down the collections.

Government Borrowing

•        The government, as at 27^th September   2024, was 121.2% ahead its prorated net domestic borrowing target of Kshs 102.1 bn having borrowed Kshs 225.9 bn of the total borrowing target of Kshs 408.4 bn. The government currently has domestic maturities worth Kshs 918.7 bn and will have to borrow Kshs 121.9 bn monthly to meet the upcoming domestic maturities and the budget deficit in the FY’2024/2025

•        e.   Total Borrowings as at the end of August 2024 amounted to Kshs 105.3 bn, equivalent to 6.9% of the revised estimates of Kshs 1,571.8 bn for FY’2024/2025 and are 40.2% of the prorated estimates of Kshs 262.0 bn. The cumulative domestic borrowing of Kshs 978.3 bn comprises of Net Domestic Borrowing Kshs 408.4 bn and Internal Debt Redemptions (Rollovers) Kshs 569.9 bn

•        Kenya has continued to receive financing from the World Bank and other bilateral lenders such as the International Monetary Fund (IMF). Recently, the Executive Board of the IMF announced that it had reached a staff-level agreement on a set of comprehensive policies and reforms needed to complete the seventh reviews of Kenya’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements and the second review under the Resilience and Sustainability Facility (RSF) arrangement. Notably, upon completion of the seventh review of Kenya’s economic program under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements, the total IMF financial commitment during the duration of the EFF/ECF program to about USD 3.60 bn (KES 466.1 bn). In addition, the completion of the second Review under the Resilience and Sustainability Facility (RSF), approved on July 17, 2023, would unlock USD 120 mn (KES 15.5 bn).

•        Kenya’s rising debt sustainability remains a significant concern with the government's borrowing appetite remaining high given the subdued economic environment coupled with an ever-present fiscal deficit. While credit risk was significantly reduced with the Eurobond buyback in February, and subsequent June maturity payment, the debt servicing costs are expected to remain high. This has led to Credit rating agencies such as Moody’s Credit Rating Agency, S&P Global Rating and Fitch to downgrade Kenya’s credit. Notably, Kenya’s latest rating by Moody was at Caa1 for both local issuer and foreign currency issuer an indication of a high credit risk, while the outlook remained negative. In addition, Fitch Ratings revised Kenya’s credit score, downgrading it to B- from a credit rating of B while also revising the outlook to stable, from a negative outlook affirmed on 16^th February 2024. Additionally, &P Global Ratings announced its revision of Kenya’s long-term sovereign credit rating, downgrading it to B-, and a stable outlook from a credit rating of B and a negative outlook

Inflation

·       Year on year (y/y) inflation rate for September 2024 decreased by 0.8% points to 3.6%, from the 4.4% recorded in August 2024. This was in line with our expectation of a decrease. Our projectiion was mainly driven by the reduction in electricity prices and the stability of fuel prices. With fuel and electricity being major production inputs, we projected that this reduction would lead to a decrease in the inflation rate

·       Super Petrol, Diesel and Kerosene remaining unchanged from the prices announced for the previous period. Consequently, Super Petrol, Diesel and Kerosene will continue to retail at Kshs 188.8, Kshs 171.6 and Kshs 161.8 per litre respectively.

·       Notably, August’s overall headline inflation was on the rise for the first time in two months. Furthermore, it has remained within the Central Bank of Kenya (CBK) target range of 2.5% to 7.5% for the fourteenth consecutive month.

•        We expect inflation rates to remain within the CBK’s target range of 2.5% - 7.5% supported by the current fiscal stance as CBR is expected to remain elevated in the medium term, as the MPC continues to implement its scope on easing the CBR. Additionally, the recent appreciation of the Kenyan shilling against major currencies, which has so far appreciated by 17.7% on YTD against the dollar is expected to keep inflationary pressures in the country down as manufacturers get relief with the lower importation costs of inputs

Currency (USD/Kshs)

•        Since the last meeting, the Kenyan Shilling has appreciated by 0.7% against the US Dollar to Kshs 129.2 as at 3^rd October 2024, from Kshs 130.1 recorded on 6^th August 2024 mainly attributable to improved foreign reserves which are currently above the statutory requirement

•        In addition, the Forex Reserves have increased significantly by 10.4% to USD 8.0 bn (equivalent to 4.1 months of import cover) as of 27^th September 2024 from USD 7.3 bn (equivalent to 3.8 months of import cover) recorded on 2^nd August June 2024. Notably, the forex reserves are above the statutory requirement of maintaining at least 4.0 months of import cover and lower than the EAC region’s convergence criteria of 4.5 months of import cover

•        We expect the Kenyan Shilling to be supported by Diaspora remittances standing at a cumulative USD 4,645.0 mn in the 12 months to August 2024, 12.7% higher than the USD 4,120.0 mn recorded over the same period in 2023, which has continued to cushion the shilling against further depreciation. In the August 2024 diaspora remittances figures, North America remained the largest source of remittances to Kenya accounting for 56.0% in the period

•        Additionally, the shilling performance and strength is expected to be supported by the sufficient forex reserves currently at USD 8.0 bn (equivalent to 4.1 months of import cover) as of 27th September 2024 from USD 7.3 bn (equivalent to 3.8 months of import cover) recorded on 2^nd August 2024. Moreover, tourism inflow receipts which came in at USD 352.5 bn in 2023, a 31.5% increase from USD 268.1 bn inflow receipts recorded in 2022, and owing to tourist arrivals that improved by 27.2% in the 12 months to June 2024, from the arrivals recorded during a similar period in 2023

GDP Growth

•        Kenyan’s economy recorded a 5.0% growth in Q1’2024, slower than the 5.5% growth recorded in Q1’2023, pointing towards a slower economic growth. The performance was driven by;

i.       The positive growth recorded in all sectors except Mining and quarrying, with most sectors recording a decline compared to Q1’2023 with Accommodation & Food Services, Mining & Quarrying and Construction Sectors recording the highest declines of 19.1%, 3.8%, and 2.9% points, respectively. Other sectors that recorded a contraction in growth rate, from what was recorded in Q1’2023 were Transport and Storage, Other Services and Public Administration sectors, of 2.8%, 2.1% and 1.8% points respectively;

ii.      The slowed growth in the  Agricultural Sector with Agriculture and Forestry recording a growth of 6.1% in Q1’2024. The performance was a decrease of 0.3% points, from the expansion of 6.4% recorded in Q1’2023. The slower growth recorded during the quarter was mainly attributable to decline in exports of coffee, fruit and cut flowers. Coffee exports declined by 13.8% to stand at 9,722.3 metric tonnes in Q1’2024 from the 11,284.9 metric tonnes recorded in Q1’2023.  

•        We expect Kenya’s GDP to continue growing at a slower pace in line with the global economy trends. However, the economy will be supported by sustained recovery in sectors like accommodation and food services sector, as well as recent fiscal policies such as subsidizing costs of crucial farm inputs such as fertilizer that are expected to support growth in the agriculture sector, which remains to be Kenya’s largest contributor to GDP,

•        The continued appreciation of the Kenya shilling has continued to support the business environment, by reducing the cost of imported inputs and decreasing the finance cost of the foreign currency denominated debts

•        Notably, the country’s PMI for the month of August 2024 increased to 50.6, up from 43.1 in July, to move into the expansion zone, an indication of a improved business environment in the country. Likewise, according to CEO’s survey- July 2024 report, the growth prospects for the Kenyan economy are moderate, but easing inflation, stability of the Shilling, and expectations of future rate continue to support growth. The survey however notes that July protests negatively affected the growth prospects, but the country has been relatively stable since

Private Sector Credit Growth

•        The latest data from CBK indicates that private sector credit growth declined to 4.0% in June 2024 from 4.5% in May 2024, mainly attributed to exchange rate valuation effects on foreign currency-denominated loans due to the appreciation of the Shilling. Notably, the 4.0% growth rate recorded in June 2024 is the lowest recorded figure in 31 months.

•        We anticipate continued adoption of the risk-based pricing model in the banking sector to continue to unlock access to credit to individuals and businesses who were not captured by the previous frame works due to being considered too risky,

•        However, the increased government borrowing is expected to continue crowding out the private sector in the short term as seen by the weighted average yield for T-Bonds coming at 17.1% in the month of September effectively edging out majority of the corporate bonds currently in the trading in market

•        Additionally, banks have started to adjust their lending rates in line with the   CBR rate which was cut to 12.75% in the August MPC meeting. This is expected to revitalize the private sector credit demand

Liquidity

•        Liquidity levels in the money markets eased significantly, with the average interbank rate since the previous MPC meeting decreasing significantly by 0.4% points to 12.7% on 27^th September 2024 from the 13.1% as of 6^th August 2024, partly attributable to tax remittances that offset Government payments.

•        We expect liquidity in the money markets to be supported by the domestic debt maturities that currently stand at Kshs 601.6 bn worth of T-bill maturities for FY’2024/2025.